If I had invested in a cryptocurrency eight years ago, I would be over 4000 times richer. I regret and I know I am not alone. All early Bitcoin adopters have one of two regrets; one, they should have bought or mined a lot of coins. This is because at inception a bitcoin was less that ten dollars, yet we are talking of bitcoins having touched a high of USD5,218.28 recently.
Secondly, they should have taken the security of their accounts more seriously. There are cases of lost passwords and eventual loss of bitcoins because without the key, you cannot access the currency.
What is this Bitcoin or cryptocurrency, where does it come from and why should you invest in it?
- What is Bitcoin?
Bitcoin is a form of digital money also referred to as cryptocurrency. It is created online via a process called mining and it is stored online in digital wallets. Each investor has a wallet and transactions take place via one person moving the currency from his wallet to the other persons wallet. The wallets are encrypted and password protected to deter unauthorized access. Am I loosing you already? Let’s get to the basics.
Mining is an online process where individuals with computing power compete to solve complex algorithms whose main aim is to secure and verify bitcoin transactions. They are rewarded through bitcoins. Once you solve a problem successfully, you get a reward in bitcoins.
At the start in 2009, this reward was 25 bitcoins every 10 minutes, now this has dropped to 12.5 bitcoins in the same time and the complexity of the algorithms has increased due to increased transactions.
Bitcoin is not the only cryptocurrency available online. We have others such as Ethereum, Litecoin, Ripple, Moreno, Dash and Zcash etc.
- How do we get to own cryptocurrency?
There are two methods of owning cryptocurrency; mining and purchasing.
In mining, individuals invest in heavy computing power and solve complex algorithms whose purpose is to keep the
cryptocurrency platforms running. This requires a huge capital to start up and there are companies such as Genesys who have invested large processing powers around the globe.
Due to this capital barrier, small players find it difficult to invest in mining. However, it is now possible to have companies crowdfunding and hence ending up with a big capita pool to invest in the equipment.
Once you invest in the computing power and solve an algorithm you are rewarded via bitcoins.
There is a finite number of bitcoins that will ever be in circulation and that number has been set at 21million. After the last coin is mined, computing power will be rewarded through miners’ fees. But this will take over 100 years.
Purchasing bitcoins is the easiest way of owning a piece of this USD 100B industry. In purchasing bitcoins, all that you need to do is to set up a wallet online through a reputable exchange and purchase coins from a willing a seller. Exchanges set up accounts for both sellers and buyers and link the two for transactions.
In Kenya, there are sites online such as LocalBitcoins and Remitano where buyers and sellers meet and transact bitcoins. Just a normal market for bitcoins.
- Why should I invest in a cryptocurrency?
Cryptocurrency serve two purposes; one, as a currency for use in day today transactions and two as a store of value.
As a day to day currency
You are a tourist travelling to New York from the rest of the world. You need to convert your local currency into dollars so that you may use them in America. If you owned Bitcoins, you would not really need to convert them into USD as you can use them as is in New York, in places where they are accepted.
We are still in early stages of the currency and we have a few institutions accepting them. For example, in Russia, you can use Bitcoins to pay taxes, in Japan the acceptance rate is high while China which account for the biggest users have moved back and forth in the regulation and even recently suspending trading in Bitcoins until the regulation is in place.
Online merchants such as amazon accept Bitcoins as payment for purchases.
In Kenya, the central bank has issued a disclaimer to the effect that the use of cryptocurrency remains at the user’s risk and that it does not guarantee it.
The world over, no country has banned its use, however, regulators are struggling to understand the implication of their use since they are open source and not owned by any one individual or any one country.
As a store of Value.
Traditionally, Gold has been used as the most preferred store of value. Most currencies are backed by a stock pile of gold. Currencies fluctuate in value and those changes are most of the times inflationary, meaning that there is a loss of value.
At current valuations, Bitcoins market capitalization is USD70B, Ethereum stands at USD30B and other cryptocurrencies at about USD10B. This value is the accepted value that investors are tapping into.
Since inception, someone who bought Bitcoins worth usd1 would be walking around with USD5000, at the recent highest capitalization.
Since bitcoins are tradable peer to peer, one can sell them at any time and unlock the value without excessive regulation.
Analysts are predicting higher prices for bitcoin. Thomas Glucksman, head of Asia Pacific business development at Gatecoin (a bitcoin and Ethereum token exchange based in Hong Kong) said that bitcoin will “creep closer” to $6,000. Billionaire Michael Novogratz has estimated a $10,000 price target for the cryptocurrency
Disadvantages of Bitcoins
Bitcoins are still not widely accepted, hence finding buyers and traders is still limited. You may travel with it and not find a place to use it, hence be forced to convert to hard currency.
Wallets can and have been lost in the past, making it mandatory to maintain the passwords very securely. If stored in a computer and that computers hardware is lost or corrupted, the investor can lose all their money.
Fluctuations in value of bitcoins due to factors of supply and demand make it completely unpredictable. It is however known that deflation is built into the value of cryptocurrency by allowing a finite number in circulation. This means that each bitcoin will be valued higher and higher and might cause spending distortions as people will tend to horde the currency.
Cryptocurrency has no physical form and its systems are discrete and impenetrable which makes it difficult for governments to adopt it. President Obama wondered how tax authorities can access records for purposes of regulation.
Cryptocurrency is money and a store of value. Faced with a choice to invest in real estate or cryptocurrency, I would do crypto.